Getting Smart about Supply Chain Management

Abstract

B2B exchanges can't improve the efficiency of every element of the supply chain. An improved information flow is what they really have to offer. Some investors continue to believe that on-line business-to-business (B2B) exchanges could improve supply chain management dramatically despite the punishment they took in financial markets last year. Many companies are still eager to jump in: during the year 2000, the total investment in B2B infrastructure exceeded $200 billion--an estimated $10 billion of it for public consortia-backed e-marketplaces alone. Still, the financial markets appear to have caught on to something that experienced supply-chain-management practitioners have suspected for a while. Although B2B exchanges (otherwise known as e-marketplaces) can help companies realize certain purchasing and transaction-processing benefits in the short term, broader improvements--particularly reductions in inventory, improved service levels, faster time to market--are harder to achieve. The promise of real benefits rests on the potential for seamlessly integrating data flows and work processes across entire enterprises and even industries. To realize this opportunity, the power of B2B exchanges would have to be combined with the enterprise-resource-planning and decision support systems that many companies have adopted in recent years. But this kind of integration is hard to pull off, and for industries with complex, segmented supply chains, it is simply inappropriate. True improvement will emerge only from the understanding that exchanges can't affect every element of the supply chain equally. The primary benefits will come from their ability to speed up the flow of information and to make it available more widely--which alone can produce gains large enough to justify the big investments that unshaken believers in the future of B2B exchanges continue to make. Elusive benefits Products reach customers through a chain of retailers, distributors, wholesalers, manufacturers, and component suppliers. Supply chain management is intended to accelerate the flow of goods, information, and capital in both directions, along the chain's entire length, and to help companies monitor that flow. Because the costs of managing the supply chain--inventory, the warehouse and distribution center, and freight--can represent 10 to 15 percent of sales in most industries, the savings that B2B exchanges promise could have a genuine impact. Indeed, programs to improve supply chains might raise margins by 1 to 2 percent of sales and improve customer service dramatically. Yet most exchanges haven't delivered these benefits. First, an exchange can't wring huge efficiencies out of all elements of the supply chain; in fact, it can have no impact at all on some of them, such as the physical flow of goods. An electronics manufacturer in California, for example, must maintain surplus inventory because otherwise the company wouldn't be able to fulfill unanticipated orders until the components for them arrived; those from Taiwan, for instance, may take several weeks to cross the Pacific and clear customs. At best, the improved information flow or collaboration that an exchange offers may eliminate the three to five days ordinarily spent planning, negotiating, and documenting transactions. The second reason for the failure of B2B exchanges to function as promised is that they themselves have perpetuated certain inefficiencies by failing to recognize that the same supply chain segment in different industries, and different supply chains (or segments thereof) in the same industry, may require different improvement levers. In men's apparel, for instance, a retailer could have a number of supply chains. One might replenish perennials such as undershirts, white dress shirts, and size-40 regular navy blazers, while a second might stock fashion items, for which demand varies according to the season, the effectiveness of efforts to promote them, and their inherent appeal. …

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